Nearly three out of four manufacturing chief financial officers (73 per cent) expect their company’s revenues to increase in the coming year – and nearly half (46 per cent) predict increased profit margins. That’s according to the eighth annual survey of mid-size and large US manufacturing company CFOs commissioned by Bank of America Business Capital. Conducted by an independent research firm in September 2005, 600 CFOs were asked their opinions on the economy, financing, M&A activity, and their involvement in foreign markets. While CFOs are optimistic about the prospects for their own companies, they are concerned about economic expansion and growth opportunities for the manufacturing sector in 2006.
Manufacturing company CFOs continue to view the current state of the US economy in a positive light. For the second year in a row, they gave it an average score of 66 on a scale ranging from 0 (extremely weak) to 100 (extremely strong). While more than half of respondents (58 per cent) believe the national economy will expand in 2006, this is the lowest average score in four years and a significant decline from the all-time high of 77 per cent cited last year. Although a majority of CFOs (60 per cent) believe the actions taken by the Federal Reserve Board have helped the economy, this is down significantly from 72 per cent last year and 83 per cent the year before.
When asked whether the manufacturing sector would expand, contract or stay the same in 2006, only one-third responded ‘expand’, a substantial decrease from the 44 per cent last year and a decline for the fourth consecutive year. Nearly
one-third of respondents (32 per cent) believe the manufacturing sector will contract in 2006.
Cautious Optimism
Despite the tempered economic and manufacturing sector outlook, CFOs continue to see growth opportunities for their individual companies. Nearly three-quarters of CFOs anticipate revenue growth next year and 46 per cent expect their profit margins to increase.
This upbeat expectation could be a function of the generally positive state of manufacturing over the past 12 months. When asked, “How would you rate the current state of the manufacturing sector on a scale of 0 (extremely weak) to 100 (extremely strong)?” the average score was 59, up slightly from last year’s rating of 58.
M&A and Global Expansion
Expectations for merger and acquisition activity are at an all time high. Thirty per cent of manufacturing companies surveyed expect to participate in a merger or acquisition in 2006, up sharply from 23 per cent last year, and the highest percentage in the survey’s history. This is likely to be due to considerable market liquidity, only 20 per cent believe there are more businesses available at lower purchase prices, down significantly from the past four years.
Survey results also reveal that companies selling to foreign markets are considerably more likely to anticipate M&A activity in 2006 than those not selling to foreign markets – 32 per cent versus 19 per cent. The same is true for companies expecting an increase in sales to foreign markets (38 per cent) versus companies expecting foreign sales to stay the same (25 per cent).
For the second year in a row, 84 per cent of manufacturing companies reported competing in world markets. Of those, 67 per cent sell to foreign markets while 72 per cent buy from foreign suppliers. Also, there has been a steady rise over the last four years in the percentage of companies with operations outside the US. That figure stands at 45 per cent, up from 39 per cent just one year ago and a mere 19 per cent in 2002.
Increases in international trade growth are expected primarily in Asia (56 per cent) and Europe (43 per cent). Sixty-eight per cent of manufacturing CFOs selling to foreign markets expect international sales to increase in 2006, the highest percentage in five years.
Cost Concerns
As a result of historically higher prices, energy is the number one cost concern of CFOs (84 per cent), followed closely by materials and equipment. The third most significant financial concern cited by respondents is the cost of healthcare.
When asked about capital expenditures over the next 12 months, nearly eight-in-ten CFOs indicated that 2006 capital expenditures will be higher (37 per cent) or the same as current levels (42 per cent). Only 21 per cent of CFOs plan to spend less or refrain from making capital expenditures altogether. Among those expecting higher than average levels of capital expenditures over the next 12 months are companies with revenues between $500m and $2bn (45 per cent), those expecting sales to foreign markets to increase (42 per cent), and businesses expecting M&A activity next year (42 per cent).
Financing Requirements
Nearly two-thirds of CFOs expect to borrow money for a variety of purposes, including capital expenditures (38 per cent), working capital (23 per cent), acquisitions (21 per cent) and US expansion (19 per cent). They also expect to use a variety of financing sources, with internal funding (68 per cent), cash flow financing (46 per cent), asset-based lending (39 per cent) and leasing (34 per cent) mentioned most frequently. Credit is also plentiful. Thirty-eight per cent say the availability of credit from their lender has increased during the past 12 months.
The bank products used most frequently by CFOs include letters of credit (63 per cent) and cash management (60 per cent). These are followed by foreign exchange (38 per cent) as necessitated by a robust increase in international business activities also revealed in this survey. Within these banking relationships, CFOs report that the most important factor by far in their consideration of senior financing is the lender’s willingness to work with them during good times and bad. Effectively meeting their credit needs and offering fewer financial covenants are the top three considerations cited by CFOs.
One thing is clear – manufacturers continue to be resourceful. CFOs are looking for ways to grow revenue outside the United States and through M&A. Indeed, many manufacturers are taking the steps necessary to succeed in an increasingly competitive and global economy.